Sincewecannot estimatecash flowsforever,wegenerally
imposeclosureindiscountedcashflowvaluationbystopping
ourestimationofcashflowssometimeinthefutureandthen
computingaterminalvaluethatreflectsthevalueofthefirm
at that point.
Wecanfindtheterminalvalueinoneofthreeways.Oneisto
assumealiquidationofthefirm’sassetsintheterminalyear
and estimatewhat otherswouldpay fortheassets thatthe
firmhasaccumulatedatthatpoint.Theothertwoapproaches
valuethefirmasagoingconcernatthetimeoftheterminal
value estimation. One applies a multiple to earnings,
revenues,orbookvaluetoestimatethevalueintheterminal
year.Theotherassumesthatthecashflowsofthefirmwill
growataconstantrateforever—astablegrowthrate.With
stablegrowth, theterminalvalue canbeestimated usinga
perpetual growth model.
Liquidation Value
Insomevaluations,wecanassumethatthefirmwillcease
operationsatapointintimeinthefutureandselltheassetsit
has accumulated to the highest bidders. Theestimate that
emergesiscalledaliquidationvalue.Therearetwowaysin
whichtheliquidationvaluecanbeestimated.Oneistobaseit
on thebookvalue oftheassets, adjustedfor any inflation
duringtheperiod.Thus,ifthebookvalueofassets 10 years
fromnowisexpectedtobe$2billion,theaverageageofthe
assetsatthatpointisfiveyears,and theexpectedinflation